UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State of incorporation) (I.R.S. Employer Identification Number)
680 North Lake Shore Drive
Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8000
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [_] No [X]
At July 31, 2007, there were 4,864,102 shares of Class A common stock and
28,387,357 shares of Class B common stock outstanding.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements,"
including statements in Part I, Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as to expectations, beliefs,
plans, objectives and future financial performance, and assumptions underlying
or concerning the foregoing. We use words such as "may," "will," "would,"
"could," "should," "believes," "estimates," "projects," "potential," "expects,"
"plans," "anticipates," "intends," "continues" and other similar terminology.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors, which could cause our actual results, performance or outcomes
to differ materially from those expressed or implied in the forward-looking
statements. We want to caution you not to place undue reliance on any
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The following are some of the important factors that could cause our
actual results, performance or outcomes to differ materially from those
discussed in the forward-looking statements:
(1) Foreign, national, state and local government regulations, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution or
transmission of adult-oriented materials, including print,
television, video, Internet and wireless materials,
(b) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue for us,
or
(c) substantive changes in postal regulations which could increase our
postage and distribution costs;
(2) Risks associated with our foreign operations, including market acceptance
and demand for our products and the products of our licensees;
(3) Our ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(4) Changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(5) Our ability to protect our trademarks, copyrights and other intellectual
property;
(6) Risks as a distributor of media content, including our becoming subject to
claims for defamation, invasion of privacy, negligence, copyright, patent
or trademark infringement and other claims based on the nature and content
of the materials we distribute;
(7) The risk our outstanding litigation could result in settlements or
judgments which are material to us;
(8) Dilution from any potential issuance of common stock or convertible debt
in connection with financings or acquisition activities;
(9) Competition for advertisers from other publications, media or online
providers or any decrease in spending by advertisers, either generally or
with respect to the adult male market;
(10) Competition in the television, men's magazine, Internet, new electronic
media and product licensing markets;
(11) Attempts by consumers or private advocacy groups to exclude our
programming or other products from distribution;
(12) Our television, Internet and wireless businesses' reliance on third
parties for technology and distribution, and any changes in that
technology and/or unforeseen delays in its implementation which might
affect our plans and assumptions;
(13) Risks associated with losing access to transponders or technical failure
of transponders or other transmitting or playback equipment that is beyond
our control and competition for channel space on linear television
platforms or video-on-demand platforms;
(14) Failure to maintain our agreements with multiple system operators, or
MSOs, and direct-to-home, or DTH, operators on favorable terms, as well as
any decline in our access to, and acceptance by, DTH and/or cable systems
and the possible resulting deterioration in the terms, cancellation of fee
arrangements or pressure on splits with operators of these systems;
(15) Risks that we may not realize the expected increased sales and profits and
other benefits from acquisitions;
(16) Any charges or costs we incur in connection with restructuring measures we
may take in the future;
(17) Risks associated with the financial condition of Claxson Interactive
Group, Inc., our Playboy TV-Latin America, LLC, joint venture partner;
(18) Increases in paper, printing or postage costs;
(19) Risks associated with certain minimum revenue amounts under certain
television distribution agreements;
2
(20) Effects of the national consolidation of the single-copy magazine
distribution system;
(21) Effects of the national consolidation of television distribution companies
(e.g., cable MSOs, satellite platforms and telecommunications companies);
and
(22) Risks associated with the viability of our subscription-, on demand- and
e-commerce-based Internet models.
For a detailed discussion of these and other factors that may affect our
performance, see Part I, Item 1A. "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2006.
3
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive Income/Loss for the Quarters Ended
June 30, 2007 and 2006 (Unaudited) 5
Condensed Consolidated Statements of Operations and
Comprehensive Income/Loss for the Six Months Ended
June 30, 2007 and 2006 (Unaudited) 6
Condensed Consolidated Balance Sheets at June 30, 2007
(Unaudited) and December 31, 2006 7
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2007 and 2006 (Unaudited) 8
Notes to Condensed Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 4. Submissions of Matters to a Vote of Security Holders 21
Item 6. Exhibits 22
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Quarters Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2007 2006
- ---------------------------------------------------------------------------------
Net revenues $ 85,652 $ 80,477
- ---------------------------------------------------------------------------------
Costs and expenses
Cost of sales (66,532) (65,567)
Selling and administrative expenses (15,157) (14,257)
Restructuring expenses (110) (1,906)
- ---------------------------------------------------------------------------------
Total costs and expenses (81,799) (81,730)
- ---------------------------------------------------------------------------------
Gain on disposal -- 29
- ---------------------------------------------------------------------------------
Operating income (loss) 3,853 (1,224)
- ---------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 623 602
Interest expense (1,204) (1,281)
Amortization of deferred financing fees (134) (134)
Other, net (168) 50
- ---------------------------------------------------------------------------------
Total nonoperating expense (883) (763)
- ---------------------------------------------------------------------------------
Income (loss) before income taxes 2,970 (1,987)
Income tax expense (1,059) (1,320)
- ---------------------------------------------------------------------------------
Net income (loss) 1,911 (3,307)
=================================================================================
Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities 96 (111)
Unrealized gain (loss) on derivatives 47 (59)
Foreign currency translation gain (loss) (108) 502
- ---------------------------------------------------------------------------------
Total other comprehensive income 35 332
- ---------------------------------------------------------------------------------
Comprehensive income (loss) $ 1,946 $ (2,975)
=================================================================================
Weighted average number of common shares outstanding
Basic 33,243 33,158
=================================================================================
Diluted 33,272 33,158
=================================================================================
Basic and diluted earnings (loss) per common share $ 0.06 $ (0.10)
=================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Six Months Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2007 2006
- ---------------------------------------------------------------------------------
Net revenues $ 171,067 $ 162,597
- ---------------------------------------------------------------------------------
Costs and expenses
Cost of sales (133,479) (128,819)
Selling and administrative expenses (29,740) (29,594)
Restructuring expenses (110) (1,906)
- ---------------------------------------------------------------------------------
Total costs and expenses (163,329) (160,319)
- ---------------------------------------------------------------------------------
Gain on disposal -- 29
- ---------------------------------------------------------------------------------
Operating income 7,738 2,307
- ---------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 1,098 1,209
Interest expense (2,566) (2,709)
Amortization of deferred financing fees (268) (268)
Other, net (307) (146)
- ---------------------------------------------------------------------------------
Total nonoperating expense (2,043) (1,914)
- ---------------------------------------------------------------------------------
Income before income taxes 5,695 393
Income tax expense (2,310) (2,911)
- ---------------------------------------------------------------------------------
Net income (loss) 3,385 (2,518)
=================================================================================
Other comprehensive income (loss)
Unrealized gain on marketable securities 153 9
Unrealized gain (loss) on derivatives 36 (61)
Foreign currency translation gain (loss) (285) 417
- ---------------------------------------------------------------------------------
Total other comprehensive income (loss) (96) 365
- ---------------------------------------------------------------------------------
Comprehensive income (loss) $ 3,289 $ (2,153)
=================================================================================
Weighted average number of common shares outstanding
Basic 33,236 33,149
=================================================================================
Diluted 33,271 33,149
=================================================================================
Basic and diluted earnings (loss) per common share $ 0.10 $ (0.08)
=================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, December 31,
2007 2006
- -------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 26,391 $ 26,748
Marketable securities and short-term investments 9,013 9,000
Receivables, net of allowance for doubtful accounts of
$4,645 and $3,688, respectively 41,502 47,728
Receivables from related parties 2,066 1,791
Inventories 13,086 12,599
Deferred subscription acquisition costs 9,385 9,931
Other current assets 11,226 9,426
- -------------------------------------------------------------------------------------
Total current assets 112,669 117,223
- -------------------------------------------------------------------------------------
Long-term investments 6,279 --
Property and equipment, net 19,962 17,407
Long-term receivables 4,517 4,665
Programming costs, net 54,621 55,183
Goodwill 133,531 132,974
Trademarks 64,705 63,794
Distribution agreements, net of accumulated amortization
of $4,119 and $3,435, respectively 29,021 29,705
Other noncurrent assets 13,850 14,832
- -------------------------------------------------------------------------------------
Total assets $ 439,155 $ 435,783
=====================================================================================
Liabilities
Acquisition liabilities $ 7,514 $ 10,773
Accounts payable 32,381 28,846
Accrued salaries, wages and employee benefits 4,738 4,896
Deferred revenues 44,325 45,050
Accrued litigation settlement 1,800 1,800
Other liabilities and accrued expenses 14,075 14,124
- -------------------------------------------------------------------------------------
Total current liabilities 104,833 105,489
- -------------------------------------------------------------------------------------
Financing obligations 115,000 115,000
Acquisition liabilities 8,048 9,692
Net deferred tax liabilities 19,260 18,422
Other noncurrent liabilities 24,616 23,552
- -------------------------------------------------------------------------------------
Total liabilities 271,757 272,155
- -------------------------------------------------------------------------------------
Shareholders' equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized;
4,864,102 issued 49 49
Class B nonvoting - 75,000,000 shares authorized;
28,765,219 and 28,743,914 issued, respectively 288 287
Capital in excess of par value 228,255 227,775
Accumulated deficit (54,306) (57,691)
Treasury stock, at cost, 381,971 shares (5,000) (5,000)
Accumulated other comprehensive loss (1,888) (1,792)
- -------------------------------------------------------------------------------------
Total shareholders' equity 167,398 163,628
- -------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 439,155 $ 435,783
=====================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
7
PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30 (Unaudited)
(In thousands)
2007 2006
- -------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 3,385 $ (2,518)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of property and equipment 2,232 1,827
Amortization of intangible assets 1,158 612
Amortization of investments in
entertainment programming 17,444 17,561
Amortization of deferred financing fees 268 268
Deferred income taxes 838 2,151
Net change in operating assets and liabilities 8,218 180
Investments in entertainment programming (17,627) (19,545)
Stock-based compensation 359 1,794
Other, net 301 932
- -------------------------------------------------------------------------------------
Net cash provided by operating activities 16,576 3,262
- -------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions (105) (7,761)
Purchases of investments (6,384) (267)
Proceeds from sales of investments -- 11,000
Additions to property and equipment (5,030) (2,826)
- -------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (11,519) 146
- -------------------------------------------------------------------------------------
Cash flows from financing activities
Payments of acquisition liabilities (5,669) (4,511)
Proceeds from stock-based compensation 82 227
- -------------------------------------------------------------------------------------
Net cash used for financing activities (5,587) (4,284)
- -------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 173 343
- -------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (357) (533)
Cash and cash equivalents at beginning of period 26,748 26,089
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,391 $ 25,556
=====================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(A) BASIS OF PREPARATION
The financial information included in these financial statements is
unaudited but, in the opinion of management, reflects all normal recurring and
other adjustments necessary for a fair presentation of the results for the
interim periods. The interim results of operations and cash flows are not
necessarily indicative of those results and cash flows for the entire year.
These financial statements should be read in conjunction with the financial
statements and notes to the financial statements contained in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. Certain amounts
reported for the prior periods have been reclassified to conform to the current
year's presentation.
(B) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board, or the FASB,
issued Statement of Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115, or Statement 159. Statement 159 allows entities to
voluntarily elect to measure many financial assets and financial liabilities at
fair value. The election is made on an instrument-by-instrument basis and is
irrevocable. We are required to adopt Statement 159 at the beginning of 2008.
The impact of the adoption of Statement 159 will be dependent upon the extent to
which we elect to measure eligible items at fair value. We are currently
evaluating the impact, if any, of adopting Statement 159 on our future results
of operations and financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in
its statement of financial position an asset or an obligation for a defined
benefit postretirement plan's funded status, (b) measure a defined benefit
postretirement plan's assets and obligations that determine its funded status as
of the end of the employer's fiscal year and (c) recognize changes in the funded
status of a defined benefit postretirement plan in comprehensive income in the
year in which the changes occur. We adopted the recognition and related
disclosure provisions of Statement 158 effective December 31, 2006. The
measurement date provision of Statement 158 is effective at the end of 2008. We
do not expect the measurement date provision of adopting Statement 158 to have a
significant impact on our future results of operations or financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We are required to adopt Statement 157 effective at the beginning
of 2008. We are currently evaluating the impact, if any, of adopting Statement
157 on our future results of operations and financial condition.
(C) RESTRUCTURING EXPENSES
In 2006, we implemented a cost reduction plan that has resulted in lower
overhead costs and annual programming and editorial expenses. As a result of the
2006 restructuring plan, we reported a charge in 2006 of $2.1 million related to
costs associated with a workforce reduction of 15 employees.
During the quarter ended June 30, 2007, we recorded an unfavorable
adjustment of $47 thousand related to our 2002 and 2001 restructuring plans and
an unfavorable adjustment of $63 thousand related to our 2006 restructuring plan
as a result of changes in plan assumptions related to excess office space and
employee severance. In addition, in 2006, we recorded a favorable adjustment of
$0.2 million and an unfavorable adjustment of $0.1 million related to our 2002
and 2001 restructuring plans, respectively, as a result of changes in plan
assumptions primarily related to excess office space.
During the six-month period ended June 30, 2007, we made cash payments of
$0.5 million related to prior years' restructuring plans. Of the total costs
related to our restructuring plans, approximately $12.4 million was paid through
June 30, 2007, with the remaining $0.3 million to be paid through 2008.
9
The following table sets forth the activity and balances of our
restructuring reserves for the year ended December 31, 2006 and for the
six-month period ended June 30, 2007 (in thousands):
Consolidation
of Facilities
Workforce and
Reduction Operations Total
- -------------------------------------------------------------------------------------
Balance at December 31, 2005 $ -- $ 1,210 $ 1,210
Reserve recorded 2,103 -- 2,103
Adjustments to previous estimates -- (105) (105)
Other -- (574) (574)
Cash payments (1,673) (263) (1,936)
- -------------------------------------------------------------------------------------
Balance at December 31, 2006 430 268 698
Adjustments to previous estimates 63 47 110
Cash payments (455) (37) (492)
- -------------------------------------------------------------------------------------
Balance at June 30, 2007 $ 38 $ 278 $ 316
=====================================================================================
(D) EARNINGS PER COMMON SHARE
The following table sets forth the computations of basic and diluted
earnings per share, or EPS (in thousands, except per share amounts):
Quarters Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2007 2006 2007 2006
- --------------------------------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net income (loss) $ 1,911 $ (3,307) $ 3,385 $ (2,518)
========================================================================================================
Denominator:
For basic EPS - weighted average shares 33,243 33,158 33,236 33,149
Effect of dilutive potential common shares:
Employee stock options and other 29 -- 35 --
- --------------------------------------------------------------------------------------------------------
Dilutive potential common shares 29 -- 35 --
- --------------------------------------------------------------------------------------------------------
For diluted EPS - weighted average shares 33,272 33,158 33,271 33,149
========================================================================================================
Basic and diluted earnings (loss)
per common share $ 0.06 $ (0.10) $ 0.10 $ (0.08)
========================================================================================================
The following table sets forth the number of shares related to outstanding
options to purchase our Class B common stock, or Class B stock, and the
potential shares of Class B stock contingently issuable under our 3.00%
convertible senior subordinated notes due 2025, or convertible notes. These
shares were not included in the computations of diluted EPS for the quarters and
six-month periods ended June 30, 2007 and 2006, as their inclusion would have
been antidilutive (in thousands):
Quarters Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
2007 2006 2007 2006
- ---------------------------------------------------------------------------------
Stock options 3,283 3,975 3,220 3,192
Convertible notes 6,758 6,758 6,758 6,758
- ---------------------------------------------------------------------------------
Total 10,041 10,733 9,978 9,950
=================================================================================
10
(E) INVENTORIES
The following table sets forth inventories, which are stated at the lower
of cost (specific cost and average cost) or fair value (in thousands):
June 30, December 31,
2007 2006
- --------------------------------------------------------------------------------
Paper $ 3,215 $ 2,917
Editorial and other prepublication costs 7,100 7,425
Merchandise finished goods 2,771 2,257
- --------------------------------------------------------------------------------
Total inventories $ 13,086 $ 12,599
================================================================================
(F) INCOME TAXES
Our income tax provision consists of foreign income tax, which relates to
our international networks and withholding tax on licensing income, for which we
do not receive a current U.S. income tax benefit due to our net operating loss
position. Our income tax provision also includes deferred federal and state
income taxes related to the amortization of goodwill and other indefinite-lived
intangibles, which cannot be offset against deferred tax assets due to the
indefinite reversal period of the deferred tax liabilities.
We utilize the liability method of accounting for income taxes as set forth
in Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. We record net deferred tax assets to the extent we believe these assets
will more likely than not be realized. In making such determination, we consider
all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax planning
strategies and recent financial performance. As a result of our recent
cumulative losses in the U.S. and certain foreign jurisdictions, we have
concluded that a full valuation allowance should be recorded for such
jurisdictions.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN
48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on description, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted FIN 48 on
January 1, 2007. Pursuant to FIN 48 and as a result of the implementation of FIN
48, we recognized no adjustment in the liability for unrecognized income tax
benefits. There have been no material changes to the amount of uncertain tax
positions since the adoption of FIN 48. At June 30, 2007, we did not have any
material unrecognized income tax benefits. We do not expect to recognize
significant increases or decreases in unrecognized income tax benefits over the
next 12 months.
Our continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense.
We file U.S., state and foreign income tax returns in jurisdictions with
varying statutes of limitations. The 2003 through 2006 tax years generally
remain subject to examination by federal and most state tax authorities.
(G) CONTINGENCIES
In 2006, we recorded a charge of $1.8 million, based on an agreement in
principle, for the settlement of litigation with Directrix, Inc., or Directrix.
The settlement amount, which was subject to Bankruptcy Court approval, was paid
in August 2007. The settlement is a compromise of disputed claims and is not an
admission of liability. We believe that we had good defenses against Directrix's
claims, but made the reasonable business decision to settle the litigation to
avoid further management distraction and defense costs, which we had estimated
would have approximately equaled the amount of the settlement.
In 2006, we acquired Club Jenna, Inc. and related companies, a multimedia
adult entertainment business, to complement our existing television, online and
DVD businesses. We paid $7.7 million at closing and $1.6 million in 2007 with
additional payments of $1.7 million, $2.3 million and $4.3 million required in
2008, 2009 and 2010,
11
respectively. Pursuant to the acquisition agreement, we are also obligated to
make future contingent earnout payments based primarily on sales of existing
content of the acquired business over a ten-year period and on content produced
by the acquired business during the five-year period after the closing of the
acquisition. If the required performance benchmarks are achieved, any contingent
earnout payments will be recorded as additional purchase price. No earnout
payments have been made through June 30, 2007.
In 2005, we acquired an affiliate network of websites to complement our
existing online business. We paid $8.0 million at closing and $2.0 million in
2006, and an additional payment of $2.0 million is required in 2007. Pursuant to
the asset purchase agreement, we are also obligated to make future contingent
earnout payments over a five-year period based primarily on the financial
performance of the acquired business. If the required performance benchmarks are
achieved, any contingent earnout payments will be recorded as additional
purchase price and/or compensation expense. During 2007 and 2006, earnout
payments of $0.1 million were made each year and recorded as additional purchase
price.
In 2002, a $4.4 million verdict was entered against us by a state trial
court in Texas in a lawsuit with a former publishing licensee. We terminated the
license in 1998 due to the licensee's failure to pay royalties and other amounts
due us under the license agreement. We appealed and the State Appellate Court
reversed the judgment by the trial court, rendered judgment for us on the
majority of plaintiffs' claims and remanded the remaining claims for a new
trial. We filed a petition for review with the Texas Supreme Court. We have
posted a bond in the amount of approximately $9.4 million, which represents the
amount of the judgment, costs and estimated pre- and post-judgment interest. We,
on advice of legal counsel, believe that it is not probable that a material
judgment against us will be sustained and have not recorded a liability for this
case in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies.
(H) BENEFIT PLANS
We currently maintain a practice of paying a separation allowance under our
salary continuation policy to employees with at least five years of continuous
service who voluntarily terminate employment with us and are at age 60 or
thereafter, which is not funded. We made cash payments under this policy of $0.1
million and $0.2 million during the quarter and six-month period ended June 30,
2007, respectively, and $0.1 million and $0.2 million during the quarter and
six-month period ended June 30, 2006, respectively.
(I) STOCK-BASED COMPENSATION
Upon adoption of Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, or Statement 123(R), we began estimating
the value of options on the date of grant using the Lattice Binomial model, or
Lattice model. The Lattice model requires extensive analysis of actual exercise
and cancellation data and includes a number of complex assumptions related to
expected volatility, risk-free interest rate, expected dividends and option
exercises and cancellations.
The following table sets forth the assumptions used for the Lattice model:
Quarters Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
2007 2006 2007 2006
- --------------------------------------------------------------------------------------------
Expected volatility 25% - 41% 29% - 43% 25% - 41% 29% - 43%
Weighted average volatility 34% 38% 34% 38%
Risk-free interest rate 4.67% - 5.04% 4.32% - 4.66% 4.67% - 5.04% 4.32% - 4.66%
Expected dividends -- -- -- --
- --------------------------------------------------------------------------------------------
The expected life of stock options represents the weighted average period
the stock options are expected to remain outstanding and is a derived output of
the Lattice model. The expected life of stock options is impacted by all of the
underlying assumptions and calibration of the Lattice model. The Lattice model
assumes that exercise behavior is a function of the option's contractual term,
vesting schedule and the extent to which the option's intrinsic value exceeds
the exercise price.
12
During the quarter and six-month period ended June 30, 2007, we granted
160,000 stock options, exercisable for shares of our Class B Stock, which will
vest over a three-year period from the grant date and expire ten years from the
grant date. There were no stock options granted during the second quarter of
2006; during the six-month period ended June 30, 2006, we granted 670,500 stock
options. The weighted average expected life for options granted during the
current quarter and six-month period was 6.3 years and during the six-month
period of 2006 was 5.8 years. The weighted average fair value per share for
stock options granted during the current quarter and six-month period was $4.64
and during the six-month period of 2006 was $6.40.
During the quarter and six-month period ended June 30, 2007, we granted
250,625 restricted stock units, which provide for the issuance of our Class B
stock if our two-year cumulative operating income target thresholds are met as
of December 31, 2008, with an additional one-year holding period for restricted
stock units that vest based on performance. There were no restricted stock units
granted during the second quarter of 2006; during the six-month period ended
June 30, 2006, we granted 188,500 restricted stock units. The weighted average
grant date fair value for restricted stock units granted during the current
quarter and six-month period was $10.61 and during the six-month period of 2006
was $14.51.
The following table sets forth stock-based compensation expense related to
stock options, restricted stock units, other equity awards and our employee
stock purchase plan, or ESPP (in thousands):
Quarters Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2007 2006 2007 2006
- ------------------------------------------------------------------------------
Stock options $ 448 $ 796 $ 165 $ 1,505
Restricted stock units 87 160 87 195
Other equity awards 50 37 92 80
ESPP 8 8 15 14
- ------------------------------------------------------------------------------
Total $ 593 $ 1,001 $ 359 $ 1,794
==============================================================================
Statement 123(R) requires that the total amount of compensation expense
recognized reflects the number of stock options that actually vest as of the
completion of the vesting period. Upon the vesting of certain stock option
grants, we adjusted our stock-based compensation expense to reflect actual
versus estimated forfeitures. During the quarter ended March 31, 2007, we
recorded a favorable adjustment of $1.0 million to reflect that actual
forfeitures for vested stock option grants exceeded the estimated amounts.
13
(J) SEGMENT INFORMATION
The following table sets forth financial information by reportable segment
(in thousands):
Quarters Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2007 2006 2007 2006
- ----------------------------------------------------------------------------------------------
Net revenues
Entertainment $ 51,838 $ 47,545 $ 102,696 $ 98,722
Publishing 22,658 23,790 46,003 47,285
Licensing 11,156 9,142 22,368 16,590
- ----------------------------------------------------------------------------------------------
Total $ 85,652 $ 80,477 $ 171,067 $ 162,597
==============================================================================================
Income (loss) before income taxes
Entertainment $ 7,301 $ 4,881 $ 11,605 $ 12,754
Publishing (2,273) (1,752) (4,669) (4,049)
Licensing 5,523 4,076 13,200 8,422
Corporate Administration and Promotion (6,588) (6,552) (12,288) (12,943)
Restructuring expenses (110) (1,906) (110) (1,906)
Gain on disposal -- 29 -- 29
Investment income 623 602 1,098 1,209
Interest expense (1,204) (1,281) (2,566) (2,709)
Amortization of deferred financing fees (134) (134) (268) (268)
Other, net (168) 50 (307) (146)
- ----------------------------------------------------------------------------------------------
Total $ 2,970 $ (1,987) $ 5,695 $ 393
==============================================================================================
June 30, Dec. 31,
2007 2006
- -----------------------------------------------------------------------------------------------
Identifiable assets
Entertainment $ 283,998 $ 288,540
Publishing 35,071 38,146
Licensing 11,368 9,386
Corporate Administration and Promotion 108,718 99,711
- -----------------------------------------------------------------------------------------------
Total $ 439,155 $ 435,783
===============================================================================================
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and accompanying notes in Item 1 and with our
Annual Report on Form 10-K for the year ended December 31, 2006. All period
references are to our fiscal periods unless otherwise indicated.
RESULTS OF OPERATIONS (1)
The following table sets forth our results of operations (in millions,
except per share amounts):
Quarters Ended Six Months Ended
June 30, June 30,
---------------- ----------------
2007 2006 2007 2006
- -------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV $ 21.6 $ 20.9 $ 41.3 $ 43.2
International TV 13.7 11.7 27.5 24.1
Online/mobile 14.6 13.5 30.3 28.8
Other 1.9 1.4 3.6 2.6
- -------------------------------------------------------------------------------
Total Entertainment 51.8 47.5 102.7 98.7
- -------------------------------------------------------------------------------
Publishing
Domestic magazine 19.0 20.2 38.1 39.4
International magazine 1.8 1.6 3.7 3.3
Special editions and other 1.9 2.0 4.2 4.6
- -------------------------------------------------------------------------------
Total Publishing 22.7 23.8 46.0 47.3
- -------------------------------------------------------------------------------
Licensing
Consumer products 7.5 6.9 16.2 13.7
Location-based entertainment 0.9 -- 1.8 --
Marketing events 2.3 2.3 2.6 2.5
Other 0.5 -- 1.8 0.4
- -------------------------------------------------------------------------------
Total Licensing 11.2 9.2 22.4 16.6
- -------------------------------------------------------------------------------
Total net revenues $ 85.7 $ 80.5 $ 171.1 $ 162.6
===============================================================================
Net income (loss)
Entertainment
Before programming amortization and
online content expenses $ 17.4 $ 15.2 $ 31.9 $ 32.5
Programming amortization and online
content expenses (10.1) (10.3) (20.3) (19.7)
- --------------------------------------------------------------------------------
Total Entertainment 7.3 4.9 11.6 12.8
- -------------------------------------------------------------------------------
Publishing (2.3) (1.8) (4.7) (4.1)
- -------------------------------------------------------------------------------
Licensing 5.5 4.1 13.2 8.4
- -------------------------------------------------------------------------------
Corporate Administration and Promotion (6.6) (6.5) (12.3) (12.9)
- -------------------------------------------------------------------------------
Segment income 3.9 0.7 7.8 4.2
Restructuring expenses (0.1) (1.9) (0.1) (1.9)
- -------------------------------------------------------------------------------
Operating income (loss) 3.8 (1.2) 7.7 2.3
- -------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.6 0.6 1.1 1.2
Interest expense (1.1) (1.3) (2.5) (2.7)
Amortization of deferred financing fees (0.2) (0.2) (0.3) (0.3)
Other, net (0.1) 0.1 (0.3) (0.1)
- -------------------------------------------------------------------------------
Total nonoperating expense (0.8) (0.8) (2.0) (1.9)
- -------------------------------------------------------------------------------
Income (loss) before income taxes 3.0 (2.0) 5.7 0.4
Income tax expense (1.1) (1.3) (2.3) (2.9)
- -------------------------------------------------------------------------------
Net income (loss) $ 1.9 $ (3.3) $ 3.4 $ (2.5)
===============================================================================
Basic and diluted earnings (loss)
per common share $ 0.06 $ (0.10) $ 0.10 $ (0.08)
===============================================================================
(1) Certain amounts reported for the prior periods have been reclassified to
conform to the current year's presentation.
15
Our revenues increased $5.2 million, or 6.4%, and $8.5 million, or 5.2%,
for the quarter and six-month period, respectively, driven by higher revenues
from our Entertainment and Licensing Groups.
Segment income increased $3.2 million and $3.6 million for the quarter and
six-month period, respectively. The quarter comparison reflected increased
profits from our Entertainment and Licensing Groups, which were partially offset
by lower Publishing Group results. The six-month comparison reflected increased
profits from our Licensing Group and lower Corporate Administration and
Promotion expenses, partially offset by lower results from our Entertainment and
Publishing Groups.
Operating income increased $5.0 million and $5.4 million for the quarter
and six-month period, respectively, due to the improved segment income coupled
with $1.8 million lower restructuring expenses in the current year.
Net income of $1.9 million and $3.4 million for the quarter and six-month
period, respectively, improved by $5.2 million and $5.9 million compared to the
respective prior year periods primarily due to the operating results previously
discussed.
Several of our businesses may experience variations in quarterly
performance. As a result, our performance in any quarter is not necessarily
reflective of full-year or longer-term trends. Playboy magazine newsstand
revenues vary from issue to issue, with revenues generally higher for holiday
issues and any issues including editorial or pictorial features that generate
additional public interest. Advertising revenues also vary from quarter to
quarter depending on economic conditions, holiday issues and changes in
advertising buying patterns. Online subscription revenues and operating results
are impacted by decreased Internet traffic during the summer months, and
e-commerce revenues and operating results are typically strongest in the fourth
quarter due to the holiday buying season.
ENTERTAINMENT GROUP
The following discussion focuses on the revenues and profit contribution of
each of our Entertainment Group businesses before programming amortization and
online content expenses.
Revenues from our domestic TV networks increased $0.7 million, or 4%, for
the quarter and decreased $1.9 million, or 4%, for the six-month period. The
increase for the quarter was primarily due to higher video-on-demand, or VOD,
revenues net of lower movie network revenues, together with an increase in
Playboy TV revenues. The decrease in revenues for the six-month period was
principally due to a decrease in movie network revenues, net of higher VOD
revenues coupled with lower linear Playboy TV revenues. Favorable variances
related to previously estimated revenues also impacted the quarter and six-month
period. We believe that second half domestic TV revenues will be approximately
equal to the first half, excluding the favorable variances related to previously
estimated revenues.
Profit contribution from our domestic TV networks increased $0.9 million
for the quarter and decreased $1.1 million for the six-month period. In addition
to the previously discussed revenue performance, profit contribution was also
impacted by lower marketing expenses related to timing of expenditures,
partially offset by increased volume-related VOD distribution expenses and
expense related to certain carriage distribution agreements that we began
amortizing during the fourth quarter of the prior year.
International TV revenues increased $2.0 million, or 16%, and $3.4 million,
or 14%, and profit contribution increased $1.7 million and $1.5 million for the
quarter and six-month period, respectively, reflecting revenue growth in our UK
and other European networks. While foreign exchange rate fluctuations resulted
in increases in both revenues and expenses, the fluctuations had an immaterial
impact on profit contribution. We believe that international TV revenues will
continue to improve for the remainder of 2007.
Online/mobile revenues increased $1.1 million, or 8%, and $1.5 million, or
5%, and profit contribution increased $0.5 million and $1.1 million for the
quarter and six-month period, respectively. Online subscription revenues were
higher in both periods primarily due to our acquisition of Club Jenna, Inc. and
related companies, or Club Jenna, in June 2006. E-commerce revenues were higher
due to improved sales from our Playboy Catalog and revenues from our new
BUNNYshop Catalog, more than offsetting the impact of licensing our Spice
Catalog in September 2006, leading to lower revenues but higher profit
contribution.
16
Revenues from other businesses increased $0.5 million, or 37%, and $1.0
million, or 38%, for the quarter and six-month period, respectively. Profit
contribution increased $0.2 million for the quarter and decreased $0.5 million
for the six-month period. The improvement was largely due to the Club Jenna
acquisition, and the six-month negative comparison was largely due to a legal
settlement recorded in the current year.
The group's administrative expenses increased $1.0 million, or 23%, and
$1.6 million, or 16%, for the quarter and six-month period, respectively,
primarily to support the acquired businesses.
Programming amortization and online content expense decreased $0.2 million,
or 2%, for the quarter and increased $0.6 million, or 3%, for the six-month
period. The six-month period reflected larger investments in online content. We
anticipate that 2007 programming amortization and online content expense will be
less than $40.0 million, compared to $41.8 million for 2006.
Segment income for the group increased $2.4 million, or 50%, for the
quarter and decreased $1.2 million, or 9%, for the six-month period,
respectively, due to the operating results previously discussed.
PUBLISHING GROUP
Domestic magazine revenues decreased $1.2 million, or 6%, and $1.3 million,
or 3%, for the quarter and six-month period, respectively. A continuation of
negative industry trends caused circulation revenues to decrease, with
subscription revenues decreasing $0.9 million, or 8%, and $1.9 million, or 8%,
for the quarter and six-month period, respectively, primarily due to downward
pressure on both renewal rates and direct-to-publisher subscription
acquisitions. Newsstand revenues decreased $0.2 million, or 8%, and $0.3
million, or 5%, for the quarter and six-month period, respectively, due to 10%
and 7% fewer copies sold, respectively. Advertising revenues were $0.2 million
lower for the quarter but $0.9 million higher for the six-month period. The
quarter results reflect an 8% decrease in average net revenue per page due to a
change in the mix of advertisers, partially offset by a 5% increase in
advertising pages. The improvement in the six-month period reflects a 10%
increase in advertising pages, partially offset by a 2% decrease in average net
revenue per page, again due to a change in the mix of advertisers. Advertising
sales for the 2007 third quarter magazine issues are closed, and we expect to
report approximately 5% higher advertising revenues and a 9% increase in
advertising pages compared to the 2006 third quarter.
International magazine revenues increased $0.2 million, or 14%, and $0.4
million, or 13%, for the quarter and six-month period, respectively.
Special editions and other revenues were flat for the quarter and decreased
$0.4 million, or 9%, for the six-month period. Fewer special editions newsstand
copies sold in both periods resulted in lower revenues of $0.4 million and $0.6
million for the quarter and six-month period, respectively.
The group's segment loss increased $0.5 million, or 30%, and $0.6 million,
or 15%, for the quarter and six-month period, respectively, because the periods
also included post-employment benefit costs related to senior editorial
employees and additional expensing of subscription collection costs. On a
comparable basis, segment results would have improved for the quarter and
six-month period as cost reductions more than offset the circulation revenue
declines previously discussed and higher editorial costs. As a result of the
continuing difficult market trends and the post-employment benefit and
subscription collection costs, we believe that the group's segment profitability
will likely be in line with what we reported in 2005.
LICENSING GROUP
Licensing Group revenues increased $2.0 million, or 22%, and $5.8 million,
or 35%, for the quarter and six-month period, respectively, reflecting royalties
from our location-based entertainment venue at the Palms Casino Resort in Las
Vegas, which opened in October 2006, and higher consumer products royalties. The
quarter and six-month period also reflected $0.4 million and $1.7 million,
respectively, in sales of original artwork compared to none and $0.4 million in
the prior year periods, respectively. The group's segment income increased $1.4
million, or 36%, and $4.8 million, or 57%, for the quarter and six-month period,
respectively, as a result of these revenue
17
increases, partially offset by growth-related costs. We continue to project
growth of approximately 20 to 25% in the Licensing Group's segment income,
excluding the impact of sales of original art.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses were flat for the quarter
and decreased $0.6 million, or 5%, for the six-month period, with both periods
reflecting additional expense related to certain trademark costs that were
previously capitalized, the previously mentioned allocation of actual
post-employment benefit costs to the Publishing Group and lower marketing
expenses.
RESTRUCTURING EXPENSES
During the quarter ended June 30, 2007, we recorded an unfavorable
adjustment of $0.1 million related to prior restructuring plans as a result of
changes in plan assumptions. For the six-month period, we made cash payments of
$0.5 million related to our restructuring plans. Of the total costs related to
our restructuring plans, approximately $12.4 million was paid through June 30,
2007, with the remaining $0.3 million to be paid through 2008.
INCOME TAX EXPENSE
Our effective income tax rate differs from the U.S. statutory rate. Our
income tax provision consists of foreign income tax, which relates to our
international networks and withholding tax on licensing income, for which we do
not receive a current U.S. income tax benefit due to our net operating loss
position. Our income tax provision also includes deferred federal and state
income taxes related to the amortization of goodwill and other indefinite-lived
intangibles, which cannot be offset against deferred tax assets due to the
indefinite reversal period of the deferred tax liabilities.
In June 2006, the Financial Accounting Standards Board, or the FASB, issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, or FIN 48. We adopted FIN 48 on
January 1, 2007. Pursuant to FIN 48 and as a result of the implementation of FIN
48, we recognized no adjustment in the liability for unrecognized income tax
benefits. There have been no material changes to the amount of uncertain tax
positions since the adoption of FIN 48. At June 30, 2007, we did not have any
material unrecognized income tax benefits. We do not expect to recognize
significant increases or decreases in unrecognized tax benefits over the next 12
months.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2007, we had $26.4 million in cash and cash equivalents
compared to $26.7 million in cash and cash equivalents at December 31, 2006. We
also had $9.0 million and $3.0 million of auction rate securities, or ARS,
included in marketable securities and short-term investments at June 30, 2007
and December 31, 2006, respectively. ARS generally have long-term maturities;
however, these investments have characteristics similar to short-term
investments because at predetermined intervals, typically every 28 days, there
is a new auction process. Total financing obligations were $115.0 million at
both June 30, 2007 and December 31, 2006.
At June 30, 2007, cash generated from our operating activities, existing
cash and cash equivalents and marketable securities and short-term investments
were fulfilling our liquidity requirements. In addition, our $50.0 million
credit facility, which can be used for revolving borrowings, issuing letters of
credit or a combination of both, had no borrowings and $10.6 million in letters
of credit outstanding, resulting in $39.4 million of available borrowings under
this facility at June 30, 2007.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities for the six months ended June 30,
2007 was $16.6 million, an increase of $13.3 million compared to the prior year
period primarily due to changes in working capital.
18
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities for the six months ended June 30,
2007 was $11.5 million, an increase of $11.7 million compared to the prior year
period. This increase was primarily due to the purchase of $6.0 million in ARS
and capital expenditures of $5.0 million, which were primarily related to
leasehold improvements at our New York office and Los Angeles programming
facility and technology-related items. The prior year period reflected proceeds
of $11.0 million from the sale of investments and payments of $7.8 million
primarily related to the acquisition of Club Jenna.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities for the six months ended June 30,
2007 was $5.6 million, an increase of $1.3 million compared to the prior year
period primarily due to acquisition liability payments related to Califa
Entertainment Group, Inc. and Club Jenna.
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The positive effect of foreign currency exchange rates on cash and cash
equivalents during the current year and prior year was due to the weakening of
the U.S. dollar against the pound sterling and Euro.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115, or Statement 159.
Statement 159 allows entities to voluntarily elect to measure many financial
assets and financial liabilities at fair value. The election is made on an
instrument-by-instrument basis and is irrevocable. We are required to adopt
Statement 159 at the beginning of 2008. The impact of the adoption of Statement
159 will be dependent upon the extent to which we elect to measure eligible
items at fair value. We are currently evaluating the impact, if any, of adopting
Statement 159 on our future results of operations and financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in
its statement of financial position an asset or an obligation for a defined
benefit postretirement plan's funded status, (b) measure a defined benefit
postretirement plan's assets and obligations that determine its funded status as
of the end of the employer's fiscal year and (c) recognize changes in the funded
status of a defined benefit postretirement plan in comprehensive income in the
year in which the changes occur. We adopted the recognition and related
disclosure provisions of Statement 158 effective December 31, 2006. The
measurement date provision of Statement 158 is effective at the end of 2008. We
do not expect the measurement date provision of adopting Statement 158 to have a
significant impact on our future results of operations or financial condition.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157
provides enhanced guidance for using fair value to measure assets and
liabilities. We are required to adopt Statement 157 effective at the beginning
of 2008. We are currently evaluating the impact, if any, of adopting Statement
157 on our future results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2007, we did not have any floating interest rate exposure. All
of our outstanding debt as of that date consisted of the 3.00% convertible
senior subordinated notes due 2025, or convertible notes, which are fixed-rate
obligations. The fair value of the $115.0 million aggregate principal amount of
the convertible notes is influenced by changes in market interest rates, the
share price of our Class B stock and our credit quality. At June 30, 2007, the
convertible notes had an implied fair value of $110.9 million.
19
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act) as of the end of the period covered by this quarterly report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in the reports that
we file or submit under the Exchange Act.
Internal Control over Financial Reporting
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to our Legal Proceedings as contained
in our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 1A. RISK FACTORS
There have been no material changes to our Risk Factors as contained in our
Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on May 23, 2007. At the
meeting, the following director nominees were elected:
Votes Votes
Nominee (1) For Withheld
- ------------------------------------------------------------------------------
Dennis S. Bookshester 4,457,959 193,985
David I. Chemerow 4,457,984 193,960
Christie Hefner 4,003,614 648,330
Charles Hirschhorn 4,458,108 193,836
Jerome H. Kern 4,457,954 193,990
Russell I. Pillar 4,435,529 216,415
Sol Rosenthal 4,434,671 217,273
Richard S. Rosenzweig 4,003,121 648,823
- ------------------------------------------------------------------------------
(1) On April 30, 2007, Donald G. Drapkin resigned from our Board of Directors,
effective immediately, in connection with his appointment as a Vice
Chairman of Lazard International and Chairman of the Investment Committee
of Lazard Ltd. He was a member of our Board of Directors since 1997 and a
member of the compensation committee. As a result, there were eight
nominees for director at our 2007 Annual Meeting of Stockholders.
Also at the meeting, the shareholders approved, with voting as set forth
below, (a) an amendment to our Second Amended and Restated 1995 Stock Incentive
Plan, or the 1995 Stock Incentive Plan, (b) an amendment to our Amended and
Restated 1997 Equity Plan for Non-Employee Directors, or the 1997 Equity Plan
for Non-Employee Directors, (c) an amendment to our Employee Stock Purchase
Plan, or ESPP, and (d) ratification of Ernst & Young LLP as our independent
registered public accounting firm, or Auditors:
Votes Votes Broker
Matter For Against Abstain Non-Votes
- --------------------------------------------------------------------------------
1995 Stock Incentive Plan 3,787,067 500,773 788 363,316
1997 Equity Plan for
Non-Employee Directors 3,644,118 643,470 1,040 363,316
ESPP 4,270,638 16,974 1,016 363,316
Auditors 4,641,945 4,291 5,712 N/A
- --------------------------------------------------------------------------------
21
ITEM 6. EXHIBITS
Exhibit Number Description
- -------------- -----------
10.1* Agreement dated October 4, 2004, between Playboy Enterprises
International, Inc. and Fiesta Palms LLC, N-M Ventures II, LLC and Nine
Group LLC
10.2 Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock
Incentive Plan
10.3 Second Amended and Restated 1997 Equity Plan For Non-Employee Directors
of Playboy Enterprises, Inc.
10.4 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and
restated
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
* Portions of this exhibit have been omitted and filed separately with the
SEC pursuant to a request for confidential treatment pursuant to Rule 24b-2
of the Exchange Act.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date: August 9, 2007 By /s/ Linda Havard
-------------- ----------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
23
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.1* Agreement dated October 4, 2004, between Playboy Enterprises
International, Inc. and Fiesta Palms LLC, N-M Ventures II, LLC and Nine
Group LLC
10.2 Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock
Incentive Plan
10.3 Second Amended and Restated 1997 Equity Plan For Non-Employee Directors
of Playboy Enterprises, Inc.
10.4 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and
restated
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
* Portions of this exhibit have been omitted and filed separately with the
SEC pursuant to a request for confidential treatment pursuant to Rule
24b-2 of the Exchange Act.
24